US ISM and Non-Farm will Determine Oil's Near-term Outlook

By IBT Staff Reporter On 03/30/10 AT 11:03 AM

Crude oil reverses earlier gains in European session as investors take profit after a +2.7% rally yesterday. Currently trading at 82, the front-month contract for WTI crude oil has been trading at upper end of March's range of 78-83.47.

Industrial production in Japan surprisingly contracted -0.9% m/m in February after surging +2.7% a month ago. The market was slightly disappointed as consensus forecast a more modest contraction of -0.5%. On annual basis, the reading expanded +31.3%.

The industry-sponsored American Petroleum Institute will release its oil inventory estimates after market close. Analysts anticipate the US Energy Department will, on Wednesday, report +2.5 mmb increase in crude oil inventory while gasoline and distillate stockpiles dropped -2 mmb and -1.25 mmb respectively. Although fuel inventories have been plunging, this is probably due to falls in refinery runs. Persistent stockbuilds in crude suggest oil fundamentals remain weak and do not justify price to rise substantially from current levels yet.

US' non-farm payrolls and ISM manufacturing are the focus of this week. Investors' risk appetite will be strongly affected if these data come out better or worse than expectations. Economists forecasts the number of non-farm payrolls increased +190K and unemployment rate stayed at 9.6% in March. If addition of jobs is sluggish, this would hurt market sentiment and hence commodity prices.

Another important event is ISM manufacturing index which probably improved modestly to 57 in March from 56.5 in the prior month. Recovery in the manufacturing sector boosts commodity prices in general but it seems to be particularly correlated to distillate demand.

Gold changes little from yesterday's close. Rallies in silver, platinum and palladium also stabilize. Despite price volatility in the short-term, we remain bullish on precious metals. Robust economic growth in China should help boost prices.

The World Gold Council forecast China's gold consumption may double over the next decade as the country has 'an insatiable appetite for gold which looks likely to continue in an environment where domestic mine supply lags behind demand'. China's State Council Development Research Center forecast that China's GDP growth will reach +12% in 1Q10, before moderating in the second and third quarter as the government will accelerate tightening to cool down economic growth.